Commercial Real Estate Mending, But Still Vulnerable to Ongoing Economic, Political Risks, Roundtable Survey Shows
Without Stronger Job Creation, More Stable Policies from Washington, CRE Markets Likely to Bump Along at Low Level, Especially in Non-Gateway Areas
“Although more respondents in our Q2 survey see current conditions, asset values and capital availability as being better than a year ago, anecdotal responses continue to show a high level of uncertainty about economic conditions here and abroad, as well as tremendous concern about the array of policy issues awaiting action or clarification by U.S. policymakers,” said Roundtable President and CEO Jeffrey DeBoer. “Add to that growing concern over borrowers’ ability to refinance vast amounts of maturing commercial mortgage debt, and it’s no surprise that expectations for the year ahead are relatively flat,” he added. (WASHINGTON D.C.) — Commercial real estate executives participating in The Real Estate Roundtable’s latest quarterly Sentiment Survey generally said market conditions have improved since a year ago, but signaled a lack of confidence in the outlook for the coming year, citing global economic risks, Washington’s ability to deal with looming budget and tax issues, ongoing Euro zone turmoil, and the vast amount of commercial mortgages maturing this year and beyond. (Download pdf of the full report)
The Real Estate Roundtable’s Q2 2012 Economic Sentiment Survey reveals that commercial real estate executives believe market conditions have improved since a year ago, but signaled a lack of confidence in the outlook for the coming year.
The survey’s “Overall Index” now stands at 70 (up slightly from 68 in Q1), indicating that respondents see the commercial real estate industry on a generally favorable slope and expect slightly improved market conditions during the coming year. Although the Overall Index is not back up to where it was in the first half of 2011 — a reading of 77 — it has recovered significantly from its nosedive to 59 in the 4th quarter of 2011 (a reflection of last summer’s unprecedented U.S. debt downgrade, European debt woes and renewed fears of recession in the U.S.).
Reflecting the industry’s “bifurcated” views of current vs. future conditions, the “Current Index” rose from 66 to 71 between Q1 and Q2, while the “Future Index” slid from 70 to 69. The current survey also shows a 13 percent jump (since Q1) in the percentage of respondents who gauge overall market conditions and asset values as being at least “somewhat better” than they were one year ago. Views on capital market conditions were even more improved between Q1 and Q2 — with a 19 percent jump in those who characterized debt capital as being at least somewhat more available than one year ago, and an 11 percent increase in perceived equity availability since a year ago.
Looking ahead, a majority of respondents still expects at least some improvement in overall market conditions, asset values and capital availability one year from today; however, more than one-third see asset values and capital market conditions remaining the same or worsening between now and the 2nd quarter of 2013.
Roundtable Chairman Daniel M. Neidich (Dune Real Estate Partners) noted, “Our Q2 survey confirms the need for swift policy action to boost employment, business investment, and economic certainty.”
“Fostering a commercial real estate recovery that extends beyond so-called ‘Class A’ or trophy assets in gateway markets still depends on an improved jobs picture, more confidence among businesses and consumers, and reduced uncertainty on looming tax and budget issues,” said Roundtable Chairman Daniel M. Neidich (Dune Real Estate Partners). “Our Q2 survey confirms the need for swift policy action to boost employment, business investment, and economic certainty.”
With roughly $1.4 trillion in commercial mortgages coming due in 2012–2015 and many properties now “underwater” due to eroded property values, DeBoer said it is “imperative that policymakers adopt measures now to foster increased equity investment in U.S. commercial real estate.” A top Roundtable priority is withdrawal of a 2007 IRS notice that significantly expanded the scope of the “Foreign Investment in Real Property Tax Act of 1980” (FIRPTA). As DeBoer testified before Congress last June, this arcane tax law originally sought to limit foreign control over U.S. farmland, but now represents a significant deterrent to overall foreign equity investment in U.S. commercial real estate.
The Roundtable also continues working with national real estate trade groups to encourage a more robust recovery of the commercial mortgage-backed securities (CMBS) market, whose roughly $32 billion in projected issuance for 2012 is a far cry from the $230 billion issued at the market’s peak in 2007. Given that CMBS debt is used across the United States to finance “Main Street” real estate, a healthy secondary market for commercial mortgages will not only ensure a broader recovery in commercial real estate markets, but it will strengthen financial institution balance sheets across the board.
The quarterly Sentiment Survey seeks to capture feedback from a broad range of real estate industry segments, asset classes, ownership vehicles and capital structures, including owners and asset managers, financial services firms and operators.
A pdf of the entire Q2 2012 report is available here. The next Sentiment Survey will be released in late July covering Q3 2012.
The Roundtable’s 2012 Policy Agenda is available here.
About The Real Estate Roundtable Sentiment Survey
The Real Estate Roundtable Sentiment Survey is the industry’s most comprehensive measure of leading real estate executives’ confidence in financial and real estate markets. The survey, conducted by FPL Advisory Group, captures the perspectives of over 100 senior real estate executives, including CEOs, presidents, board members, and other executives from a broad set of industry sectors including owners and asset managers, financial services firms and operators.
About The Real Estate Roundtable
The Real Estate Roundtable brings together leaders of the nation’s publicly-held and privately owned real estate ownership, development, lending and management firms with the leaders of national real estate trade associations to jointly address key national policy issues relating to real estate and the overall economy. Collectively, Roundtable members’ portfolios contain over 5 billion square feet of office, retail and industrial properties; over 1.5 million apartment units; and in excess of 1.3 million hotel rooms. Participating trade associations represent more than 1.5 million people involved in virtually every aspect of the real estate business.
Source: The Real Estate Roundtable